The Dodge & Cox Global Stock Fund had a total return of 3.5% for the fourth quarter of 2015, compared to 5.5% for the MSCI World Index. For 2015, the Fund had a total return of –8.1%, compared to –0.9% for the MSCI World.
Market Commentary
After a weak and volatile third quarter, global equity markets appreciated during the fourth quarter: the MSCI World was up 6% in both local currency terms and U.S. dollars. Within the MSCI World, every region and sector, except for Energy, posted gains.
In 2015, the U.S. dollar’s sharp appreciation against both developed and emerging market currencies was a headwind: the MSCI World was up 2% in local currency compared to down 1% in U.S. dollars, while the MSCI Emerging Markets Index was down 6% in local currency compared to down 15% in U.S. dollars. U.S. economic activity continued to expand at a moderate pace: household spending and business investment increased, the housing market strengthened, and labor market conditions improved. In December, the U.S. Federal Reserve raised its target range for the federal funds rate for the first time in nine years.
Emerging markets faced significant macroeconomic challenges during the year, including fears of slowing growth in China. Those concerns, amplified by the government’s decision to devalue the renminbi, negatively impacted commodity prices and commodity-driven emerging markets around the globe. In Brazil, fiscal and political struggles intensified. More broadly, global oil prices fell more than 30% during the year.
Against this macroeconomic backdrop, the Fund experienced disappointing results in 2015, stemming from three main factors. First, across equities, value stocks (the lower valuation portion of the market) underperformed growth stocks (the higher valuation portion of the market) by one of the widest spreads since the global financial crisis. The Fund, which is value -oriented, was significantly affected by this performance divergence. Second, emerging markets collectively underperformed developed markets. The Fund’s investments in individual companies domiciled in a number of emerging market countries (including Brazil and South Africa) negatively impacted results. Third, there are some individual holdings (identified below) that meaningfully detracted from results for the year.
During the year, we intensively revisited and retested our thinking on many of the Fund’s holdings in the context of these changing macroeconomic conditions and valuations. As part of our bottom-up fundamental research process, a broad cross section of our team thoroughly investigated individual company holdings, which included traveling across the globe to conduct on-the-ground due diligence.
Through this comprehensive process, we reaffirmed our view that the Fund’s holdings have attractive valuations and favorable growth prospects over our three- to five-year investment horizon. Global equity valuations are attractive (MSCI World traded at 15.7 times forward estimated earnings on December 31) and we remain optimistic about the long -term outlook for the portfolio. In addition, we continue to find attractive new long- term investment opportunities. For example, we recently initiated a position in JD.com (the largest direct sales online retailer and second-largest e-commerce platform in China).
Our experienced and stable team has weathered past periods of market turbulence by remaining steadfast in our investment approach. We continue to invest with a long-term horizon, guided by our belief that owning companies at attractive valuations can generate solid returns over time.
Fourth Quarter Performance Review
The Fund underperformed the MSCI World by 2.0 percentage points for the quarter.
Key Detractors from Relative Results
The Fund’s holdings in the Financials sector (up 1% compared to up 4% for the MSCI World sector) hindered performance. Barclays (down 12%), Kasikornbank (BKK:KBANK, Financial) (down 12%), and Credit Suisse (down 7%) were notable detractors.
Within the Health Care sector, the Fund’s holdings (up 1% compared to up 7% for the MSCI World sector) hurt results. Sanofi (SNY, Financial) (down 10%) and Novartis (down 6%) lagged.
Weak returns in the Telecommunication Services sector (down 13% compared to up 6% for the MSCI World sector) also had a negative impact. MTN Group (down 33%) performed poorly.
Additional detractors included Baker Hughes (down 11%) and Time Warner (down 5%).
Key Contributors to Relative Results
Strong returns in the Information Technology sector (up 15% versus up 9% for the MSCI World sector), combined with a higher average weighting (22% versus 14%), had a positive impact. Baidu (BIDU, Financial) (up 38%), Microsoft (MSFT, Financial) (up 26%), Alphabet (up 25%), and Samsung Electronics (up 14%) were notable performers.
Additional contributors included New Oriental Education & Technology (up 55%) and Charles Schwab (up 16%).
2015 Performance Review
The Fund underperformed the MSCI World by 7.2 percentage points in 2015.
Key Detractors from Relative Results
The Fund’s average overweight position in emerging markets (17% versus 0% for the MSCI World), a particularly weak region of the portfolio (down 21%), significantly detracted from results.
Relative returns in the Financials sector (down 15% compared to down 4% for the MSCI World sector), especially in the emerging markets, hurt performance. BR Malls (BSP:BRML3, Financial) (down 53%), Kasikornbank (down 39%), Standard Chartered (down 39%), and ICICI Bank (down 28%) all detracted.
Weak returns in the Consumer Staples sector (down 18% compared to up 6% for the MSCI World sector) hurt results. Wal-Mart (down 27%) performed poorly.
The Fund’s holdings in the Telecommunication Services sector (down 24% compared to up 2% for the MSCI World sector) had a negative impact. MTN Group (down 53%) was a meaningful detractor.
Additional detractors included Teck Resources (down 69% since date of purchase), Petrobras (down 55%), HP Inc. (down 37%), and Time Warner (down 23%).
Key Contributors to Relative Results
Strong returns from the Fund’s holdings in the Health Care Providers and Services industry (up 18% compared to up 12% for the MSCI World industry) contributed to results. Cigna (up 42%) and UnitedHealth Group (up 18%) were notable performers.
The Fund’s holdings in the Automobiles industry (up 11% compared to up 1% for the MSCI World industry) aided performance. Nissan Motor (up 24%) and Honda Motor (up 13%) performed well.
Additional contributors included Nintendo (up 61% to date of sale), New Oriental Education & Technology (up 54%), Alphabet (up 45%), and Time Warner Cable (up 25%).
1The Fund’s total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends but, unlike Fund returns, do not reflect fees or expenses. The MSCI World Index is a broad-based, unmanaged equity market index aggregated from 23 developed market country indices, including the United States and Canada. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. All returns are stated in U.S. dollars, unless otherwise noted.
MSCI World is a service mark of MSCI Barra.
Before investing in any Dodge & Cox Fund, you should carefully consider the Fund’s investment objectives, risks, and charges and expenses. To obtain a Fund’s prospectus and summary prospectus, which contain this and other important information, visit dodgeandcox.com or call 800-621-3979. Please read the prospectus and summary prospectus carefully before investing.
